The question on everyone’s mind in the crypto space is whether the market has bottomed out. Since November, the market value of cryptos has decreased by more than $2 trillion. There has been a collapse of two key digital assets, Luna, a $40 billion cryptocurrency, and TerraUSD, a $16 billion stablecoin designed to maintain parity with the U.S. dollar. Its price dropped below $20,000 earlier this month, its lowest since December 2020.
But the fallout is far from complete. Earlier this month, Singapore-based Three Arrows Capital (3AC), a highly levered crypto trading firm with $200 million of exposure to Luna revealed that it was nearly insolvent. Three Arrows’ had borrowed large sums from numerous crypto firms including New Jersey’s Voyager Digital and New York-based BlockFi. In order to survive Three Arrows default, the two digital asset exchanges turned to billionaire Sam Bankman-Fried, founder of FTX and the richest person in crypto, worth some $20.5 billion. Between FTX and his quantitative trading firm Alameda, he provided the companies with $750 million in credit lines. There is no guarantee that Bankman-Fried will recoup his investment. “You know, we’re willing to do a somewhat bad deal here, if that’s what it takes to sort of stabilize things and protect customers,” he says.
“We’re willing to do a somewhat bad deal here, if that’s what it takes to sort of stabilize things.”
Bankman-Fried’s cash infusions are far from altruistic. He has emerged as a smart vulture capitalist in the beleaguered crypto market, knowing full well that his own fortune depends on its healthy rebound and growth. Bankman-Fried has also bought into crypto brokerage Robinhood, where FTX has already accumulated a 7.6% stake, and is rumored to be considering an acquisition.
Bankman-Fried denies any active merger talks with Robinhood but tells Forbes that more crypto exchange failures are coming. “There are some third-tier exchanges that are already secretly insolvent,” says Bankman-Fried.
Fried’s FTX, along with Coinbase, Kraken, and Binance, are giants among digital asset exchanges. They have millions of customer accounts and functionally they operate similarly to online stock brokerages. But outside of these whales, there are more than 600 crypto exchanges around the world operating in a largely unregulated frontier. Never heard of AAX, Billance and Hotbit? You aren’t alone, but like Coinbase they trade bitcoin, ether and dogecoin and offer generous margin loans–as much 20 times their initial capital— to their clients. Lacking any meaningful regulatory oversight many crypto exchanges have been vulnerable to scammers and hacks.
Japanese exchange Coincheck was hacked for $530 million in crypto in 2018, Singaporean exchange KuCoin lost $275 million in 2020, and then in December 2021 Cayman Island-based Bitmart was breached for $200 million. Back in 2016, Bitifinex was hacked to the tune of nearly 120,000 bitcoin worth $2.5 billion now.
But, despite the generous bailouts, not even Bankman-Fried is able, or willing, to throw good money after bad in perpetuity. “There are companies that are basically too far gone and it’s not practical to backstop them for reasons like a substantial hole in the balance sheet, regulatory issues, or that there is not much of a business left to be saved,” says Bankman-Fried, who declined to name any specific crypto exchanges.
What Exchanges Are Predicted To Fail?
The digital asset exchange business generally lacks standards to certify a new entity before or after they start soliciting client funds. The SEC doesn’t regulate the exchanges and the Commodities Futures and Trading Commission has oversight of only a handful of crypto derivatives markets. In the United States there is no member organization like FINRA to self- regulate crypto exchanges.
Bankman-Fried is worried about continued failures because, during the euphoria of rising crypto prices, exchanges kept upping the ante to attract customers with generous yields for deposits. BlockFi or Voyager were promising yield payments to customers, upwards of 12% per year that had to be paid for either by charging at least that much more interest to borrowers or more likely, by putting that money to work in decentralized finance DeFi applications. That worked fine when crypto was going nowhere but up. It looks disastrous now.
“There are companies that are basically too far gone and it’s not practical to backstop them.”
Like J.P. Morgan during the stock market panic and crash of 1907, Bankman-Fried is taking advantage of the crypto chaos to expand his empire. He recently closed the acquisition of Liquid, a troubled Japanese exchange. BlockFi and Voyager Digital are in his grip and despite his denials, Robinhood may be next. According to sources familiar with his loans to Voyager, Alameda is likely to lose at least $70 million of the credit it has already extended. In 2021, publicly-traded Voyager’s Digital had a market value of more than $3 billion. Today it shares trade for pennies and its market cap of $62 million points to an imminent bankruptcy filing.
Is FTX also failing?
Despite the carnage, Bankman-Fried tells Forbes that FTX remains profitable and has been for the past 10 quarters. FTX’s biggest rival Coinbase lost $432 million in the first quarter of 2022 and its stock is down almost 90% from its all-time high.
Bankman-Fried also has his eye on crypto miners, many of whom leveraged their balance sheet at a breakneck pace to quickly scale and take advantage of this 21st-century digital gold rush. The stocks of publicly-trading crypto miners including Marathon Digital Holdings and Riot Blockchain are down more than 60% year to date.
One bellwether crypto-asset Bankman-Fried is not worried about is Tether, the world’s largest dollar-pegged stablecoin with a market cap exceeding $70 billion. Many industry watchers have deemed it a ticking time bomb with questionable collateral whose failure would almost certainly be an existential threat to the entire cryptocurrency market. Tested during the Luna collapse Tether briefly lost its $1 peg and fell to a price of 95 cents. However, it successfully processed over $10 billion worth of withdrawals and has since recovered.
Says Bankman-Fried, “I think that the really bearish views on Tether are wrong…I don’t think there is any evidence to support them.”
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